Construction Starting to Edge Back?

Looking for “Green Shoots”

Spring is here. As the days get longer the tress are leafing out and the green shoots of new growth are showing. I know all of us are looking for those same “green shoots” in the construction market….and there are actually some out there! For construction to come back, two things have to happen—-we have to see demand increase and there has to be financing available to fund the demand. Let me share some information that shows there are a couple of “green shoots” out there for 2011!

Demand:

Believe it or not, demand is slowly improving. The chart below shows the AIA Architectural Billings Index. While it was down to 50 in January (from almost 55 in December), the last several months it has been at 50 or better. That constitutes a growing marketplace. So while you may not have seen the potential work increase in your backlog yet, it means that Architects are getting busier—-which is a positive sign for the marketplace.

The increase in demand is spotty in terms of geography and market segment. Submarkets like the Washington DC metro area are stronger than Georgia. Texas went into the slowdown later and is now trying to come back as the increase in oil prices helps the local market place (good that it is helping somewhere, for the pain to the rest of us is real!). In market segments, according to McGraw Hill, residential multifamily construction will be up in 2011 by 23%. That’s off a low base, but shows growth for two years in a row. Ironically, the increase in mortgage down payments, stricter lending standards and the fear of losing money in home ownership are pushing more families into rental properties. This is helping the multifamily construction market. Commercial construction is to increase 16%, but that is up from a three year 62% decrease…..so it is all relative. But it’s very nice to be talking about increases instead of decreases!

Financing:

A couple of cross currents here, but the news is better than it was a year ago. The bad news is that the FDIC “problem” bank list is up to 884 as of December, 2010, which is the highest in over a decade. That means a lot of the smaller banks that financed local construction projects are not making loans currently. However, two positive signs are helping construction projects obtain financing in 2011:

CMBS Increased Issuance: Commercial Mortgage Backed Securities (CMBS) were the lifeblood of construction financing in the last decade. That market dried up in 2009, with issuance declining to less than $1 billion. In 2011, according to Standard & Poors the market should increase to around $35 million. This helps projects have funding and banks to recirculate their dollars on loans they will make.

New Construction Financing Sources/Spigots Back on: The Wall Street Journal in February reported that fresh capital is restarting long-stalled construction projects. It notes that J.P. Morgan Chase Bank has lent as much for construction in six weeks of 2011 as it did for all of 2010. It also notes that the OliverMcMillan Buckhead project in Atlanta, Georgia has received financing after two years of being essentially a “hole in the ground”. FLSA has seen several projects in the past two months come back to life….a good sign for all of us!

2011 will not be a barn burner for any of us, as there is still too much of a hangover from the “go go go” days of the last decade. But the fundamentals are slowly changing to create a stronger construction market, and for all of us it can not come to soon!